Friday, March 21, 2008

Profound statement re inflation

This is a very insightful statement, imho (from here):

"There is increasing concern among some on the (Fed) that freewheeling rate cuts are creating a significant problem with the Fed's goal of anchoring inflation expectations," said Scott Anderson, senior economist at Wells Fargo Economics. If people, companies and investors believe inflation will pick up, they will act in ways that can make inflation worse.

"It is important that inflation expectations remain stable. If those expectations become unhinged, they could rapidly fuel inflation," Plosser said in February. "Moreover, as we learned from the experience of the 1970s, once the public loses confidence in the Fed's commitment to price stability, it is very costly to the economy for the Fed to regain that confidence."

Basically, the Fed's job with respect to inflation is to manage inflation expectations, and if people expect higher inflation they tend to take actions with compound economic slowdown. This in turn causes the government to spend more money to artificially churn the economy more, which causes more inflation, etc. This is called stagflation, and the Fed seems to be doing everything they can to cause it currently.

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